The fallacy of decentralised autonomous organisations: Decentralised in name only?

Decentralised Autonomous Organisations (DAOs) are “… blockchain-based organisations fed by virtual open networks of contributors” (Santana & Albareda, 2022, p. 1). One of the defining features of DAOs is their decentralised governance (Hassan & De Filippi, 2021; Santana & Albareda, 2022). Decentralisation lies at the heart of the cypherpunk ethos, which runs through the Web3 community and aims to disrupt social, political, and economic asymmetries (Ramiro & de Queiroz, 2022). Accordingly, DAOs should serve as a tool for disrupting these imbalances within organisations.

Falling short of the decentralisation promise

Does the reality match up with the cypherpunk ethos? A recent vote on Uniswap, a significant decentralised exchange, provides an answer (Kessler, 2023). The vote centred on selecting a technical partner for Uniswap’s deployment on an alternative blockchain. A significant token holder, a venture capital investment firm a16z, opposed the proposal. Fortunately for the supporters of the proposal, a16z had delegated most of its tokens to other parties at that time. If a16z had immediately controlled all the tokens, it would have had enough power to reject the proposal single-handedly. This scenario is a possibility in the future.

This story exemplifies the typical experience: DAOs frequently fall short of their promise to be decentralised (e.g., Axelsen et al., 2022; Jensen et al., 2021). Instead, many DAOs replicate similar asymmetries as those observed in traditional organisations. Using the term “DAO” may be more rhetorical than practical, designed merely to generate stakeholder enthusiasm. Indeed, research suggests that having certain decentralised features is associated with higher market capitalisation or more social media followers (Chen et al., 2021). Given these benefits, why not label yourself a DAO?

Unpacking DAO voting: The reality of (de)centralisation

The general lack of decentralisation in DAOs can be observed in their voting process. The usual voting process has four stages: idea generation, sentiment investigation, voting, and execution (Zhao et al., 2022). Despite the availability of open discussion spaces, community participation in idea generation and sentiment investigation is often low. For instance, in the case of Uniswap at the beginning of 2023, out of thousands of members, only a few dozen commented on the proposal ideas in the forum, and a small percentage of them participated in sentiment investigation (Uniswap, 2023b, 2023a). As a result, decentralisation may only exist on paper, while in practice, the decision-making process is centralised around an active minority of members.

As illustrated in the introductory Uniswap story, power in voting often rests with a small group of influential token holders, while most DAO members do not participate in decision-making (Bellavitis et al., 2022; Jensen et al., 2021). In instances where power is consolidated within a DAO, it can lead to the effective takeover of the organisation, as demonstrated by the case of BuildFinance, where a malicious user drained its treasury by obtaining a majority hold (BuildFinance, 2022).

Moreover, the use of off-chain voting further undermines the decentralisation of many modern DAOs. It leaves the execution of decisions in the hands of a small group of individuals who hold the signing keys and control the organisation’s assets (Bellavitis et al., 2022). This can render the act of voting a mere symbolic gesture, as those with signing keys have collective freedom to act as they please. This was demonstrated in the case of Wonderland (Jha, 2022; Thurman, 2022), where the founder publicly stated his intentions before the vote ended. Furthermore, individuals with access to the assets can act without any voting. For instance, some DAOs have fallen prey to “rug pulls,” where founders drain the treasuries, as in the case of AnubisDAO, where investors lost $60 million (Grabundzija, 2021).

The fallacy of DAO decentralisation

Although starting as a centralised entity and gradually becoming decentralised has some justifications for DAOs (e.g., Chen et al., 2021; Walden, 2020), there is no guarantee that decentralisation will eventually occur. Trustless technologies are a fundamental feature of blockchains (Becker & Bodó, 2021). Yet a DAO community often has to rely on a few individuals to relinquish their power voluntarily. It is often uncertain whether decentralisation hopes will not be in vain.

Contemporary DAOs often resemble traditional tech organisations, with a significant degree of community participation and the “DAO” label. Therefore, they should be treated as such. Nothing is wrong in this respect. The trouble comes when one considers them decentralised simply because they label themselves a DAO. Thus, DAO members and scholars must assess each organisation individually rather than assuming they are all decentralised entities. While some guidelines for evaluating a DAO’s level of decentralisation have been proposed (e.g., Axelsen et al., 2022), the topic calls for further research.

It is essential to recognise that having DAOs that are not authentically decentralised carries various implications for their regulatory status, adherence to the cypherpunk ethos (Ramiro & de Queiroz, 2022), and self-definition (Hassan & De Filippi, 2021; Santana & Albareda, 2022). These pitfalls could potentially lead to the implosion of DAOs as an emerging form of organising human activity with the aid of blockchain. To avoid such a fate, “centralised” DAOs must immediately establish clear decentralisation goals and develop a plan to achieve them. Alternatively, they should reconsider labelling themselves as DAOs.

References

Axelsen, H., Jensen, J. R., & Ross, O. (2022). When is a DAO Decentralized? Complex Systems Informatics and Modeling Quarterly, 31, 31. https://doi.org/10.7250/csimq.2022-31.04

Becker, M., & Bodó, B. (2021). Trust in blockchain-based systems. Internet Policy Review, 10(2), 1–10.

Bellavitis, C., Fisch, C., & Momtaz, P. P. (2022). The rise of decentralized autonomous organizations (DAOs): A first empirical glimpse. Venture Capital, 0(0), 1–17. https://doi.org/10.1080/13691066.2022.2116797

BuildFinance. (2022). BuildFinance on Twitter. Twitter. https://twitter.com/finance_build/status/1492591680716951556

Chen, Y., Richter, J. I., & Patel, P. C. (2021). Decentralized Governance of Digital Platforms. Journal of Management, 47(5), 1305–1337. https://doi.org/10.1177/0149206320916755

Grabundzija, A. (2021). Police forces jump into AnubisDAO saga after $60 million ‘rug’. CryptoSlate. https://cryptoslate.com/police-forces-jump-into-anubisdao-saga-after-60-million-rug/

Hassan, S., & De Filippi, P. (2021). Decentralized Autonomous Organization. Internet Policy Review, 10(2), 1–10. https://doi.org/10.14763/2021.2.1556

Jensen, J. R., von Wachter, V., & Ross, O. (2021). How decentralized is the governance of blockchain-based finance: Empirical evidence from four governance token distributions. ArXiv Preprint. https://arxiv.org/ftp/arxiv/papers/2102/2102.10096.pdf

Jha, P. (2022). Wonderland’s treasury saga exposes the fragility of DAO projects today. Cointelegraph. https://cointelegraph.com/news/wonderland-s-treasury-saga-exposes-the-fragility-of-dao-projects-today

Kessler, S. (2023). Contentious Uniswap Vote Highlights the Opaqueness of Decentralized Governance. CoinDesk. https://www.coindesk.com/tech/2023/02/08/contentious-uniswap-vote-highlights-the-opaqueness-of-decentralized-governance/

Ramiro, A., & de Queiroz, R. J. G. B. (2022). Cypherpunk. Internet Policy Review, 11(2), 1–10.

Santana, C., & Albareda, L. (2022). Blockchain and the emergence of Decentralized Autonomous Organizations (DAOs): An integrative model and research agenda. Technological Forecasting and Social Change, 182, 121806. https://doi.org/10.1016/j.techfore.2022.121806

Thurman, A. (2022). Wonderland Founder: ‘I’m Here to Fix This and Make It All Back’. CoinDesk. https://www.coindesk.com/tech/2022/02/01/wonderland-founder-im-here-to-fix-this-and-make-it-all-back/

Uniswap. (2023a). Community Governance. Uniswap Governance. https://gov.uniswap.org/

Uniswap. (2023b). Uniswap Proposals. Snapshot. https://snapshot.org/#/uniswap

Walden, J. (2020, January 9). Progressive Decentralization: A Playbook for Building Crypto Applications. Andreessen Horowitz. https://a16z.com/2020/01/09/progressive-decentralization-crypto-product-management/

Zhao, X., Ai, P., Lai, F., Luo, X. (Robert), & Benitez, J. (2022). Task management in decentralized autonomous organization. Journal of Operations Management, 68(6–7), 649–674. https://doi.org/10.1002/joom.1179